Is 45% an appropriate long-term retention rate for a company? It might be for a big social media site, such as Twitter. But for an enterprise SaaS company, such as Salesforce, anything below 90% might signal trouble, according to an analysis by two product and growth specialists.
Acquisition costs are key. If acquiring customers doesn't involve much more than good SEO, which might be the case for Twitter, having a lot of churn doesn't have to be the end of the world, said Lenny Rachitsky, growth advisor and former AirBnB engineer.
For companies spending a lot to target specific customers, churn is expensive — and not just because customer acquisition costs (CAC) tend to be high. Lost customers have a downward effect on factors that impact a company's lifetime value formula, said Casey Winters, chief product officer at EventBrite.
Winters and Rachitsky teamed up this year on an analysis of what good and great long-term retention rates look like. Their conclusion: It depends on the business. Consumer businesses tend to see more churn, so retention rates are lower; business-to-business models see less churn, so their retention rates are higher.
"Retention is not only the primary measure of product value and product-market fit for most businesses; it's also the biggest driver of monetization and acquisition."
Casey Winters
Chief Product Officer, EventBrite
There are other factors as well: whether a business targets large or small clients, has a lot of products or just a few, the amount of money it charges, the lifespan of its product, and whether its retention is dependent on network effects, among others.
"Every company has a bunch of different factors that impact retention," Winters said in a SaaS Brief article on the analysis. These factors are a starting point for identifying and addressing weaknesses in retention strategy, he said.
Improving retention
The product and growth specialists call retention the single most important factor in product success.
"Retention is not only the primary measure of product value and product-market fit for most businesses; it's also the biggest driver of monetization and acquisition," Winters said.
This is partly because of the trickle-down effect of retention on other metrics.
"Retention is the enabler of the best acquisition strategies."
Casey Winters
Chief Product Officer, EventBrite
"Retention is the enabler of the best acquisition strategies," Winters said. "For virality or word of mouth, for example, one of the key factors ... is how many people can talk about or share your product. The more retained users, the more potential sharers. ... For paid acquisition or sales, the more retained users, the higher lifetime value, the more you can spend on paid acquisition or sales and still have a comfortable payback period."
If a business's retention rates aren't meeting expectations, there are three ways to improve them, he said.
- Make the product more valuable by improving the product-feature fit. "Every product is a bundle of features," he said. "Your product may be missing features that get more marginal users to retain better."
- Do a better job connecting users to the value of the product. Try improving onboarding, adding emails and other notifications as expiration nears, and either reducing or increasing friction, depending on which one promotes value. "[Reduce] friction in the product where it’s too complex and [add] friction when it’s required to connect people to the value," he said.
- Create a new product. If a business is really struggling to retain users, it likely doesn't have good product-market fit and might need to introduce something new.
Before embarking on a strategy, a business should try understanding how retention rates relate to its business model. A business-to-business company targeting small companies as customers can expect to have low retention rates, because smaller businesses fail at a faster pace than big companies. At the same time, there are more small businesses than large, so the opportunity for acquisitions is greater.
There are other relationships to consider, including network effects. Slack, for example, whose customers bring in networks of people to collaborate, can expect less churn because of the way the platform ties everyone together, creating a barrier to leaving.
"Retention matters," Rachitsky said in his analysis. "No other metric is as singularly telling of whether your business will thrive or die. And so, the better you understand what good retention looks like for your business, the better shot you have at [thriving]."
